TMI Blog2010 (1) TMI 1220X X X X Extracts X X X X X X X X Extracts X X X X ..... 99/- in respect of CAN Plant. 3.1 At the time hearing, the learned AR for the assessee fairly conceded that the issue raised in the first ground of appeal for the assessment year 2004-05 is decided against the assessee by the Ahmedabad Bench of the Tribunal in assessee s own case for the assessment year 2003-04, by order dated 4.4.2008 holding that that since relevant plant and machinery at GIDC is not used for the purposes of business and since facts are identical, following the decision of the Tribunal in assessee s own case, the disallowance is upheld. 4. Ground no.2 in appeal for the assessment year 2004-05 and only ground in appeal for the assessment year 2000-01 is against the order of the learned CIT(A) confirming the addition as deemed dividend u/s 2(22)(a) of the Act. The amount of addition for AY 2004-05 is ₹ 38,20,047/- whereas same for the assessment year 2000-01 is ₹ 25,88,540/-. 4.1 The matter was carried to CIT(A), who upheld the addition made by the AO though on different ground, by observing as under: 6. Ground no.2 is against treating a sum of ₹ 38,20,047/- as deemed dividend taxable as income as deemed dividend , 6.1 The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th written consent of all the shareholders; 6.5 The AO has opined that the annual rental value in respect of occupancy rights has to be taxed as deemed dividend in the hands of the appellant and adopting the rate of ₹ 8.855 per sq. ft per month on the area of 35950 sq. sft, the deemed dividend was worked out at ₹ 3820047/-; 6.6 Having considered the facts of the case and he provisions of section 2(22) (e) I am of the view that section 2(22) (e) carves out legal fiction to cover any payment by way of advance or loan to a shareholder who is beneficial owner of the shares as deemed dividend to the extent to which he company possesses accumulated profits. In the instant case there is no payment of loan or advance to the appellant and therefore section 2(22)(e) is not applicable. However it is seen that the benefit could be covered section 2(22)(a). reads as under: any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ; 6.7 Here the appellant is a shareholder of M/s YIPL who by way of amendment in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this year; c) though the lower authorities have invoked the provisions of section 2(22) of the Act, the amount charged to tax is computed with reference to the provisions of section 22/23 of the Act being the annual value of the properties; d) the annual value of he properties cannot be charged to tax since the assessee has been allowed depreciation on the cost of shares to which the property rights are attached signifying the use of the property for the purposes of the business of the assessee; and e) therefore, the addition by way of deemed dividend is not justified under any provision of the Income Tax Act; 4.3 The Learned DR, on the other hand, relied upon the findings of the CIT(A). 4.4 We have considered, the rival submissions. We find that the provisions of section 2(22) (a) has been extracted by CIT(A) in paragraph 6.6 of his order. By reading the aforesaid definition it is clear that dividend will include under clause (a) only when it amounts to distribution by a company out of accumulated profits coupled with release of any part of the assets of the company. Therefore, to attract section 2(22)(a), the dividend can be taxed only when there is distribution out of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities were performed by the assessee to utilize the above incentives the question of any loss on this account did not arise and disallowed ₹ 29,37,576/- claimed by the assessee 9.2 In appeal request for filing additional evidence in regard to the aforesaid claims were filed comprising of details of DEPB receivables, shipping bill-wise and export invoice-wise, details of ECGC claims, correspondence between amalgamating company M/s Arayan Pesticides ltd and ECGC and the proof that these were written off during the year 9.3 The documents were referred to the AO who vide remand report dated 5.5.2008 stated that the management control over M/s Aryan Pesticides ltd was effective from 1.4.2003 thus the appellant would have over the control of all the documents of the amalgamating company much earlier and year these were not produced before AO. On merit it is argued that from the additional evidence submitted it could not be said with certainty that the claims have indeed become bad. 9.4 The appellant in response to the remand report submitted that up to 31.3.2002 the appellant had 47% shareholding in the amalgamating company and did not have any managerial control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as income and taxed accordingly. The credit in respect of DEPB receivable is shown to be ₹ 40,46,878/- which includes the sum of ₹ 1492386/- of the erstwhile M/s Arayan Pesticides ltd. The office of the DGFT informed the assessee that the claim has become time barred and hence not allowable. Therefore, the amount is allowable as business loss. If the claim is allowable in the hands of the amalgamating company but not claimed and allowed in the hands of the said company are still allowable in the hands of M/s Aryan Pesticides ltd. The Hon ble SC in the case of CIT V/s T Veerabhadra Rao (155 ITR 152) held as under : If the same assessee is carrying on a business and he writes off a debt relating to the business as irrecoverable, he would, without doubt, be entitled to a corresponding deduction u/s 36(1)(vii) subject to the fulfillment of the conditions set forth in section 36(2). If a business, along with its assets and liabilities, is transferred by one owner to another, there is no reason why a debt so transferred should not be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not imperative that the assessee referred to in sub-clause (a) of section 36(2)(i) must necessarily mean the identical assessee referred to in subclause (b) of the same section. A successor to the pertinent interest of a previous assessee would be covered within the time of sub-clause(b). The successor-assessee, in effect, stapes into the shoes of the predecessor 5.6 When the claim is made and the assessee is pursuing the claim, the revenue authorities cannot held that debt got time barred in earlier years and hence to disallowed in the year of claim. When the claim is made u/s 36(1)(vii) or u/s 28, the AO is not to decide the year in which the claim become irrecoverable. Till the claim is pursued and not written off, it is not bad debt. Only when the assessee chooses to write off, the AO is to examine whether the debt is bad or not. This is to precise intervention of the amended provision of section 36(1)(vii) as amended w.e.f 1.4.1989. The amendment has to put an end to the controversy as to decide the year of debt becoming bad. The assessee can pursue the claim and only when it finds that the claim is not realizable, may choose to write it off. Therefore, both the claims i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said party with the assessee. Therefore, only net amount can be considered to be bad. As regards the account of M/s Oscar Chemical Ltd, though the amount is not bad debts in strict sense but by way of credit note issued against the bill no. 296-297 dated 22.7.2000. Since, this claim was settled during the year loss is allowable as such. Thus, the outstanding balances is the name of Bhogyeshwar Dye Chem Ltd is allowable as bad debts as the provisions of condition of 36(1)(vii) read with section 36(2) of the Act are satisfied. In the case of Oscar Chemical Ltd, the same being credit note issued to the parties is allowable as business loss. 7. The next grounds of appeal for the assessment year 2004-05 is in respect of confirming denial of the claim for carry-forward of loss on transfer of capital assets of ₹ 14,28,06,864/- including loss of ₹ 1,06,25,567/- 7.1 The assessee claimed long term capital loss on sale of equity shares of and units of UTI are as under: Sale of equity shares of DFPCL (136,909,274) Sales of equity shares Nova Synthetic Ltd (7,048,709) Units of U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of any income on transfer of Units under Chapter-III of the Act. What can be set off either u/s 70 or 71 is the loss computed under the head Capital Gain The computation under the head Capital Gain will take place provided profit beyond the income on such transfer of capital assets is chargeable to tax.. Since the income on transfer of units of UTI are not to form part of the total income, till the same will never enter the computation of Capital Gain under Chapter IV-E, relating to computation of Capital Gain . What did not enter to computation under Chapter-IV will not be eligible for set off and carry forward either u/s 70 or 71 of the Act. The Hon. Supreme Court in the case of CIT V/s Harprasad and co. (P) Ltd (99 ITR 118(S) held as under : From the charging provisions of the Act, it is discernible that the words income or profit and gains should be understood as including losses also, so that, in open sense profits and gains represent plus income whereas losses represents minus income . In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enitally exempt fro income-tax, neither the assessee is require to show the same in the return nor is the ITO under any obligation to compute or assess it, much less for the purpose of carry forward. In the instant case, the assessee in his return had not shown any capital loss . He had claimed his loss as a revenue loss. The ITO could therefore, reject the assessee s claim to carry forward the loss merely on the ground that it was not a revenue loss . His further finding that it was a capital loss was only incidental and, in fact, was not necessary. From what had been said above, to follows as a necessary corollary that during the period second 12B of the 1922 Act did not make income under the head capital gains chargeable, an assessee was neither required to show income under the head in his return, nor entitled to file a return showing capital loss merely for the purpose of getting the same computed and carried forward. Sub-section (2A) of section 22A of 1922 Act would snot give him such a right because the operation of that subsection is in terms, confined to, (i) a loss which is sustained under the head profits and gains of business, profession or vocation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal Gain . The assessee is not entitled for any such loss being set off against income under the any head or right to carry forward the same under section 74 of the Act. Therefore, the loss on transfer of units UTI cannot be allowed to be carried forward to subsequent years. 9. The next ground of appeal in AY 2004-05 is the addition to the book profit computed under section 115JB of the Act being the provision of gratuity and the deemed dividend added under section 2(22) of the Act while computing the income under regular provisions of Act. 9.1 In respect of provision for gratuity, the addition to book profit was confirmed by the learned CIT(A) by applying the decision of Apex Court in the case of Shree Sajjan Mills Ltd V/s CIT -156 ITR 585 (SC), wherein it was held that the provisions for gratuity is unascertained liability. The said decision was followed by Ahmedabad Bench of the Tribunal in ITA No.2368/Ahd/2006 dated 2.3.2007 in the case of ACIT V/s HOEC Bhardhl India ltd. 9.2 The learned AR for the assessee submitted that the Hon. Bombay High Court in the case of CIT V/s Echjay Forgings Pvt ltd (251 ITR 15) held that the provisions for gratuity on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 f) Miscellaneous scrap sales -Rs.15,10,000/- 10.1 The AO held that the receipts as referred in the ground shall not form the part of profits of business as per Clause (baa) of Explanation to Section 80HHC and hence 90% thereof are to be reduced from computation of Profits of the business . The CIT(A) by applying the decision of Apex Court in the case of CIT V/s Ravindranathan Nair -213 CTR 227 (SC) held that processing charges constitutes independent income and hence 90% thereof will not form part of Profits of Business under clause (baa) of Explanation to section 80HHC. In respect of other income also the same are to be reduced from total turnover and therefore on parity of the same would have to be removed from profit of the business for computation of deduction u/s 80HHC. 10.2 The learned AR of the assessee submitted that the decision of the Hon. Supreme Court in the case of CIT V/s Ravindranathan Nair (supra) was in a different context. The effect of the said decision has been considered by the Mumbai Bench of the Tribunal in the case of Star India Limited in ITA No.1249//M/2004 and ITA No.378/M/2004 dated 16.4.2008. The ITAT has opined that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er from the export house could be considered as part of the sale proceeds for claiming deduction us/ 80HHC. The contention of the revenue was that export incentive was received independently in Indian currency without having any link or nexus with any foreign earning and therefore the same could not be considered as part of the sale proceeds. Consequently, deduction u/s 80HHC (IA) could not be allowed. On the other hand, the contention of the assessee was that under the contract between the assessee and the export house, the assessee was entitled to receive the export incentives as part of sale consideration and therefore, it was entitled to deduction in respect of such amount. Though the judgment of Bombay High Court in the case of Bangalor clothing co. was referred to by the learned counsel for the assessee but the said judgment does not find any place in the operative part of the judgment of the apex court. The entire operative part of the judgment related to the interpretation of section 80HHC (1A). After interpreting the said provisions, the court held the tribunal was justified in holding that export incentive was integral part of sale price realized by he assessee . Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Following the same decision, we hold that the miscellaneous sales being sale of by-product , insurance claim foreign exchange fluctuation receipt, sales tax refund, miscellaneous sales are not similar to the receipt like brokerage , Commission , rent , interest , charges and hence applying the principle of ejusdem generis, , such receipts, to the extent of 90% thereof will not be excluded while computing the profit of business under clause (baa) of explanation to sec.80HC. 10.7 As regards, reduction of above receipts under the context of deduction from book profit admissible sub-section (4) of section 115JB of the Act, once again the issue has been answered by ITAT, Mumbai in the case of DCIT V/s M/s Glenmaker Laboratories ltd (AY 2004-05) order dated 9.11.2009 . As per the said decision the amount of profit eligible for deduction u/s 80HHC shall be computed with reference to book profit and the amount to be reduced is the appropriate percentage thereof as provided in section 80HHC(1B). The computation shall be with reference to book profit and not as per the income computed under the regular provisions of Income Tax Act but only subject to restriction put under sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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